CHANAKYA NATIOANL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA-800001

“DISCHARGE OF SURETY ”

FINAL DRAFT

SUBMITTED TO:
Mr.Vijay Kr. Vimal
(FACULTY OF LAW)

SUBMITTED BY:
NAME: AMRIT ADITYA
COURSE: B.B.A.,LL.B(Hons.)
ROLL NO: 1814
SEMESTER: 3rd
SUBJECT: CONTRACT-II

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 ACKNOWLEDGEMENT
The present project on the “DISCHARGE OF SURETY” has been able to get its
final shape with the support and help of people from various quarters. My sincere
thanks go to all the members without whom the study could not have come to its
present state. I am proud to acknowledge gratitude to the individuals during my
study and without whom the study may not be completed. I have taken this
opportunity to thank those who genuinely helped me.

With immense pleasure, I express my deepest sense of gratitude to MR. VIJAY

KUMAR VIMAL., Faculty for legal History , Chanakya National Law University
for helping me in my project. I am also thankful to the whole Chanakya National
Law University family that provided me all the material I required for the project.
Not to forget thanking to my parents without the co-operation of which completion
of this project would not had been possible.

I have made every effort to acknowledge credits, but I apologies in advance for
any omission that may have inadvertently taken place.

Last but not least I would like to thank Almighty whose blessing helped me to
complete the project.

AMRIT ADITYA

ROLL NO. 1814, THIRD SEMESTER

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 DECLARATION BY THE CANDIDATE

I, AMRIT ADITYA, student of Chanakya National Law University hereby

declare that the work reported in the B.B.A.LL.B.(HONS.) project report entitled:
“DISCHARGE OF SURETY” submitted at Chanakya National Law University,
Patna is an authentic record of my work carried out under the supervision of
MR. VIJAY KUMAR VIMAL . I have not submitted this work elsewhere for
any other degree or diploma. I am responsible for the contents of my Project
Report.

(Signature of the Candidate)

NAME: AMRIT ADITYA

ROLL NO: 1814
COURSE: B.B.A., LL.B. (Hons.)
SEMESTER: 2018-2019 (3rd)
SESSION: 2017-2022

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AIMS AND OBJECTIVES
HYPOTHESIS
RESEARCH METHODOLOGY
The researcher has relied on doctrinal method of research to complete the project.

SOURCES OF DATA
The researcher has relied upon both primary as well as secondary sources to
complete the project.
1. Primary sources:, judgment
2. Secondary sources: Books, Website
Book: Contract II R.K. Bangia

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CONTENT
1. INTODUCTION……………………….
2. WHO IS SURETY?...............................
3. SECTIONN 130……………………..
4. SECTION 131………………………..
5. SECTION 133…………………………….
6. SECTION 134…………………………
7. SECTION 135……………………….
8. SECTION 139……………………….
9. SECTION 141……………………
10.CONCLUSION……………………..
11.BIBLIOGRAPHY……………………..

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INTRODUCTION
When the liability of surety, which he had undertaken under a contract of
guarantee, is extinguished or come to an end, he is said to be discharged from the
liability. The modes of discharge of a surety, as recognized by the Indian contract
act, are as under:

1. Revocation by surety (sec 130)

2. By surety’s death (sec 131)
3. By variance in terms of the contract (sec 133)
4. By release or discharge of principal debtor (sec 134)
5. When creditor compounds with, gives time to, or agrees not sue, the
principal debtor (sec 135)
6. By creditor’s act or omission impairing surety’s eventual remedy (sec139)
7. By loss of the security by the creditor (sec 141)

According to Section 126 of the Indian Contract Act, 1872 A “contract of

guarantee” is a contract to perform the promise, or discharge the liability, of a third
person in case of his default. The person who gives the guarantee is called the
“surety”, the person in respect of whose default the guarantee is given is called the
“principal debtor”, and the person to whom the guarantee is given is called the
“creditor”.

There are three contracts and three parties in a contract of guarantee, the surety
is one of them. Surety is also known as guarantor. Surety is said to be discharged
when his liability comes to send. Section 130 to Section 142 of the Indian Contract
Act, 1872 deals with the Provision of "Discharge of Surety"

The ways In which a surety is discharged from his suretyship are exceedingly
numerous, for a surety is a favoured debtor. Speaking generally, however, under
the law of principal and surety, a creditor must not either act in a manner
inconsistent with the contract of guarantee itself, or do anything to prejudice the
right of contribution between the co sureties for should he do so, the surety will be
released, either wholly or protanto.

A guarantor may be discharged or released from his liability under the guarantee
by a subsequent release or agreement, by operation of law, by payment or by

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performance of the principal debtor obligation or by a breach of the contract of
guarantee and it may be stated as a general rule that any act or omission on the part
of the creditor in breach of his duty under the guarantee, that increases the
guarantor's risk or otherwise injures his rights and remedies, discharges the
guarantor from his liability under the guarantee, at least to the extent of the injury
so occasioned.

Who is surety?
A surety is a person obligated by a contract under which one person agrees to pay a
debt or perform a duty if the other person who is bound to pay the debt or perform
the duty fails to do so. Usually, the party receiving the surety's performance will
first try to collect or obtain performance from the debtor before trying to collect
from the surety. A surety is often found, for example, when someone is required to
post a bond to secure a promise.

Contracts sometimes contain a waiver of suretyship defenses. Defenses that may

apply include modification of the obligation, release of security or of another party,
impairment of recourse, and waiver and release by assignment, sublease, or
bankruptcy. For example, such a waiver has the effect of waiving the defense of
impairment of collateral. The definition of impairment of collateral includes failure
to comply with applicable law in disposing of the collateral.

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SECTION 130 OF INDIAN CONTRACT ACT ,1872
REVOCATION BY SURETY
A continuing guarantee may at any time be revoked by the surety, as to future
transactions, by notice to the creditor. —A continuing guarantee may at any time
be revoked by the surety, as to future transactions, by notice to the creditor."
Illustrations

(a) A, in consideration of B’s discounting, at, A’s request, bills of exchange for C,
guarantees to B, for twelve months, the due payment of all such bills to the extent
of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards,
at the end of three months, A revokes the guarantee. This revocation discharges A
from all liability to B for any subsequent discount. But A is liable to B for the
2,000 rupees, on default of C. (a) A, in consideration of B’s discounting, at, A’s
request, bills of exchange for C, guarantees to B, for twelve months, the due
payment of all such bills to the extent of 5,000 rupees. B discounts bills for C to
the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the
guarantee. This revocation discharges A from all liability to B for any subsequent
discount. But A is liable to B for the 2,000 rupees, on default of C."

(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills
that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice of
revocation. C dishonours the bill at maturity. A is liable upon his guarantee. (b) A
guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B
shall draw upon him. B draws upon C, C accepts the bill. A gives notice of
revocation. C dishonours the bill at maturity. A is liable upon his guarantee."

The point may be further explained by the case of offord v. davies1 in this case, A
promised in favour of B that if B discounted bill for C, A would guarantee the
payment of bills to the extent of 600 euro, during a period of 12 calendar months.
Some bills were discounted by B and payment for the same was made. Thereafter,
A gave notice to B that A would no more discounting of any bills. In spite of the
notice, B continued to discount bills. The bills not having paid, B sued A for the

1
(1862) 12 C.B.N.S 748 : R.R. 491

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same. It was held that A could not be made liable as a surety for the bills
discounted by B, after A’s notice to B.

Revocation as to future transaction is possible, when there are separated distinct

transaction contemplated in the contract. When the consideration is single and
individual, for instance, where a continued relationship is estd. On thee faith of a
certain guarantee, no revocation of the same is possible. Thus, if a servant is
employed on the basis of a guarantee as to his good conduct, the guarantee is not
revocable so long as the servant continuous in service.

Again, where the surety has entered into a continuing guarantee agreement in terms
that it is to continue and remain in operation for all subsequent transaction, it
would not be open to him to turn around and revoke the guarantee.

In Sita Ram Gupta v. Punjab National Bank, the agreement of guarantee read as :
"The guarantors hereby declare that this guarantee shall be a continuing guarantee
and shall not be considered as cancelled or in any way affected by the fact that at
any time the said accounts may show no liability against the borrower or may even
show a credit in his favour but shall continue to be guarantee and remain in
operation in respect of all subsequent transactions." The appellant having entered
into an agreement Of guarantee with the respondent bank revoked by a letter
written to the Manager of the Bank, before the loan was in fact advanced by the
bank. Referring to the manner in which the agreement was entered into, it was held
that it was not open to the appellant to revoke the guarantee. The Apex Court said
that the agreement not being unlawful, would override the statutory provision
contained in Section 130 of the Contract Act, 1872, since he had waived the
benefit of Section 130 by entering into agreement of guarantee with the bank The
appellant was thus held not entitled to deny liability to pay the debt advanced by
the bank.

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SECTION 131 OF INDIAN CONTRACT ACT ,1872
REVOCATION BY SURETY’S DEATH
The death of the surety operates, in the absence of any contract to the contrary, as a
revocation of a continuing guarantee, so far as regards future transactions. —The
death of the surety operates, in the absence of any contract to the contrary, as a
revocation of a continuing guarantee, so far as regards future transactions."

The effect of the death of the surety is that it results in automatic revocation of the
continuing guarantee as to future transactions. There may , however, be no
revocation guarantee on the death of surety, if there is a contract to the effect

SECTION 133 OF INDIAN CONTRACT ACT,1872

BY VARIANCE IN TERMS OF CONTRACT
When the surety has undertaken liability on certain terms, it is expected that they
will remain unchanged during the whole period of guarantee. If there is any
variance in the terms of the contract between the principal debtor and the creditor,
without the consent of the surety, the surety gets discharged as regards transactions
subsequent to such a change. The reason for such a discharge is that the surety
agreed to be liable for a contract which is no more there, and he is not liable on the
altered contract because it is different from the contract made by him. Section 133,
which makes a provision in this regard, is as follows :

"Any variance, made without the surety's consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance."

Section 133 has been explained with the help of the following illustrations :

(a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards,
B and C contract, without A's consent that B's salary shall be raised and that he
shall become liable for one-fourth of the losses on overdrafts. B allows a customer

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to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent, and is not liable to make
good this loss.

(b) A guarantees C against the misconduct of B in an office to which B is

appointed by C, and of which the duties are defined by an Act of the Legislature.
By a subsequent Act, the nature of the office is materially altered. Afterwards, B
misconducts himself. A is discharged by the change from future liability under his
guarantee, though the misconduct of B is in respect Of a duty not affected by the
later Act.

(c) C agrees to appoint B as his clerk to sell goods at yearly salary, upon A's
becoming surety to C for B's duly accounting for money received by him as such
clerk. Afterwards, without A's knowledge or consent, C and B agree that B should
be paid by a commission on the goods sold by him and not by a fixed salary. A is
not liable for subsequent misconduct of B.

(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil
supplied by C to B on credit. Afterwards, B becomes embarrassed, and, without the
knowledge of A, B and C contract that C shall continue to supply B with oil for
ready money, and that the payments shall be applied to the then existing debts
between B and C. A is not liable on his guarantee for any goods supplied after this
new arrangement.

(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees

repayment. C pays the 5,000 rupees to B on the 1st January. A is discharged from
his liability, as the contract has been varied, inasmuch as C might sue B for the
money before the first of March.

In Bonar v. Macdonald,2 the defendant was a surety for the conduct of a bank
manager. Subsequent to this agreement, the bank enhanced manager's salary and
the manager agreed to be liable for 1/4 of the losses on discounts allowed by him.
This arrangement between the bank and its manager had been made without the
knowledge of the surety. It was held that this arrangement had resulted in the
discharge of surety. Lord Cottenham observed "Any variance in the agreement to

2
(1850) 3 H.L.C. 226

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which the surety has subscribed, which is made without the surety's knowledge or
consent, which may prejudice him, or which may amount to a substitution of a new
agreement for a former agreement' even though the original agreement may,
notwithstanding such variance, be substantially performed, will discharge the
surety."

One such illustration where variance in the contract would discharge the surety, is
found in the Indian Partnership Act' According to Section 38 of that Act, a
continuing guarantee given to a partnership firm, or to a third party in respect of
the transactions of a firm is revoked as to future transactions from the date there is
a change in the constitution of the firm. The reason for this provision in the Indian
Partnership Act is that every guarantee given in relation with a partnership firm is
on the assumption that the constitution of the firm will remain unchanged during
the period of guarantee. If in spite of such a change, the guarantee already given is
to continue, the parties are free to make a contract to that effect.

If there is a written contract of guarantee and there is no variance of the same in

writing, the validity of the contract is not affected. In Amrit Lal v. State Bank of
Travancore,3 the credit limit of the debtor, which had been fixed at Rs. 1,00,00()
was first reduced to IRS. 50,000 and then again raised to Rs. 1,00,000 without
consulting the surety. This was done by oral instructions to the cashier only (and
not by altering any document). It was held that in this case there was no variation
in the terms of the contract within the meaning of Section 133, and, therefore, the
surety had not been discharged thereby.

In Anirudhan v. Thomco's Bank,4 the alteration was not prejudicial to the interest
of the surety, and the question which had arisen was whether the surety was
discharged in such a case. The facts of the case are as follows :

The appellant agreed to stand as surety to the tune of Rs. 25,000 for an overdraft to
be allowed by the respondent bank to the principal debtor, Shankran. The bank
agreed to allow the overdraft only for Rs. 20,000 and not for Rs. 25,000. The
principal debtor altered this amount of guarantee from Rs. 25,000 to Rs. 20,000.
The alteration in this case, which was made by the principal debtor, was not to the

3
AIR 1968 S.C. 1432
4
AIR 1963 S.SC. 746

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prejudice of the surety. The question before the Supreme Court was whether such
an alteration, which was to the benefit of the surety, had discharged the surety. The
majority decision (2 : 1) was that when the alteration is to the benefit of the surety,
that is not a material alteration. Such an alteration is unsubstantial and that does not
discharge' the surety from liability.3 Hidayatullah, J.

observed5 :-

"The question before me is whether a document jointly executed by two persons

creating a liability equal for both is to be regarded as materially altered if the
liability is reduced equally for both but the alteration is made only by one of them.
In my opinion, such an alteration be regarded as unsubstantial and not
otherwise....ln my judgment, the particular document, in this case, cannot be said to
have been materially altered...The alteration does not save the surety from liability
arising under it."6

It may be submitted that this decision does not appear to be logical interpretation
of Section 133. According to Section 133, "Any variance" in the contract, made
without surety's consent discharges the surety. The Act does not draw any
distinction between the variances beneficial or prejudicial to the surety in material
particulars as compared to the original one. If the terms of the contract are
changed, the person who signed the original contract cannot be made liable either
on the basis of the original contract, because that has been destroyed by alteration,
or on the basis of altered contract, because he never agreed to that.

The surety, it is held, would be liable for all transactions which had taken place
prior to variation. Variation can discharge surety only with regard to such of those
transactions which take place subsequent to variation.7

5
The minority view expressed by Sarkar, J.
6
State bank of Bikaner& Jaipur v. G.P.Goyal (2005)(2) BC 49
7
AIR 2003 S.SC. 623

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SECTION 134 OF INDIAN CONTRACT ACT,1872
BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR
The provision concerning the discharge of the surety on the release or discharge of
the principal debtor as contained in Section 134 and its illustrations, is as under :

"134. Discharge of surety by release or discharge of principal debtor.—The surety

is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor released, or by any act or omission of the creditor, the
legal consequence of which is the discharge of the principal debtor.

Illustrations

(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies

goods to B, and afterwards B becomes embarrassed and contracts with his creditors
(including C) to assign to them his property in consideration of their releasing him
from their demands. Here B is released from his debt by the contract with C, and A
is discharged from his suretyship.

(b) A contracts with B to grow a crop of indigo on A's land and to deliver it to B
at a fixed rate, and C guarantees A's performance of this contract. B diverts a
stream of water which is necessary for irrigation of A's land, and thereby prevents
him from raising the indigo. C is no longer liable on his guarantee.

(c) A contracts with B for a fixed price to build a house for B within a stipulated
time, B supplying the necessary timber. C guarantees A's performance of the
contract. B omits to supply the timber, C is discharged from his suretyship."

It has already been noted that according to Section 128, the liability of the surety is
coextensive with that of the principal debtor. Therefore, if by any contract
between the creditor and the principal debtor, the principal debtor is released, or by
any act or omission of the creditor, the principal debtor is discharged, the surety
will also be discharged from his liability accordingly.

Another reason for the discharge of the surety on the release or discharge of the
principal debtor is as follows. According to Section 140, after payment or
performance of his obligation, the surety can seek reimbursement from the

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principal debtor. If the principal debtor is no more liable, the surety's remedy
would be affected thereby. If surety's remedy against the principal debtor is
affected, that should also result in the discharge of the surety.

Where there are co-sureties, a release by the creditor of one of them does not
discharge the others.8 Even if one of the co-sureties is released by the creditor, he
does not thereby become released from his responsibility to contribute to the other
sureties.9

No discharge after the decree is passed

In Charan Singh v. Security Finance Pvt. Ltd.,10 the question before the Delhi High
Court was whether a settlement between the creditor and the principal debtor after
a joint decree has been passed against the principal debtor and the surety would
result in the discharge of the surety. It was held that the provisions of Sections 133
to 139 apply only where the rights of the parties have not crystallized and merged
in a decree of the Court, and they do not apply to the judgment-debtors.

In the above case, the creditor obtained a decree for Rs. 30,155 jointly against the
two principal debtors and the surety. After that, the creditor entered into an
agreement with one of the principal debtors that if he paid a sum of Rs. 10,000/-,
the . creditor (decree-holder) will not proceed further against him. After this
amount had been paid, the creditor sought to recover the balance from the surety. It
was held that such a compromise after the decree had been passed did not
discharge the surety and, therefore, the creditor was held entitled to recover the
balance of the amount from the surety.

Since the liabilities of principal debtor and guarantors was independent of each
other; as responsibility to repay loan was joint and several, hence same could be
enforced against guarantors even without initiating any proceedings against
principal debtor.11

8
Section 138
9
See Section 146
10
AIR 1988 DELHI 130
11
SICOM Ltd V. Padmashri Mahipatrai J. Shah III (2006) BC 304 (Bom)

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SECTION 135 OF INDIAN CONTRACT ACT,11872

WHEN CREDITOR COMPOUNDS WITH, GIVES TIME, OR AGREES NOT

TO SUE THE PRINCIPAL DEBTOR

Section 135 mentions further circumstances when a contract between the creditor
and the principal debtor can result in the discharge of the surety. The Section is as
under :

"135. Discharge of surety when creditor compounds with, gives time to, or agrees
not to sue, principal debtor.—A contract between the creditor and the principal
debtor by which the creditor makes a composition with, or promises to give time
to, or not to sue, the principal debtor, discharges the surety, unless the surety
assents to such contract."

According to this Section, a contract between the creditor and the principal debtor
discharges the surety in the following three circumstances :

(i) When the creditor makes composition with the principal debtor;

(ii) When the creditor promises to give time to the principal debtor; and

(iii) When the creditor promises not to sue the principal debtor.

It may be noted that in the above stated circumstances, the surety is discharged if
the creditor and the principal debtor make such contract without the consent of the
surety. If such a contract is made with the consent of the surety, he would not be
discharged.

(i) Creditor compounding with the principal debtor

When the creditor makes compositions with the principal debtor without the
consent of the surety, this means variation in the original contract. Its obvious
consequence, therefore, is the discharge of the surety from the liability. For
example, A borrows Rs. 10,000 from B. C stands as a surety as regards the
repayment of loan by A to B. Thereafter, A and B agree that A may repay Rs.
5,000 instead Of Rs. 10,000. C is thereby discharged from liability as a surety.

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(ii) Creditor promising to give time to the principal debtor

Promise to give time to the principal debtor means extending the period of
payment which was not contemplated in the contract of guarantee. The surety
expects that the creditor will take the performance from the principal debtor
without any delay. If the creditor causes the delay by giving more time to the
principal debtor and then the surety is asked to be liable on the debtor's default, this
Would delay the surety's action for reimbursement against the principal debtor,
and, therefore, such an arrangement works to the prejudice of the surety. When the
creditor gives time to the principal debtor without the consent of the surety, the
surety is discharged even though the extension of time is for the benefit of the
surety.12

The reason for such discharge was thus explained by the Privy Council in Mahanth
Singh v. U Ba Yi13 :

"A surety is discharged if the creditor, without his consent, either releases the
principal debtor or enters into a binding agreement with him to give him time. In
each case, the ground of discharge is that the surety's right to pay the debt at any
time and after paying it, to sue the principal in the name of the creditor is interfered
with."

In Kurian v. The Alleppey C.C.M.S. Society,14 the creditor filed a suit against the
debtor for the recovery of some money due from the debtor. Then there was a
compromise between the two parties to the suit according to which the debtor was
allowed to pay the decretal money within nine months from the date of
compromise. This happened without the knowledge or consent of •the surety. It
was held that this arrangement meant giving time to the debtor within the meaning
of Section 135, and the surety was, therefore, discharged from his liability.

Agreement by the creditor with the principal debtor to take the payment in
instalments instead of in lump sum, amounts to giving time to the principal debtor
and that results in the discharge of the surety.15 The position is the same even after

12
Samuel V. Howarth, 3 Mer. 272
13
AIR 1939 P.C. 110 at 111
14
AIR 1975 Kerala 44.
15
Amrit lal V. State bank of Travancore, AIR 1968 S.C. 1432

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a joint decree is passed against the principal debtor and the surety. Thus, if after the
passing of the decree, the creditor decree-holder without the consent of the surety,
grants instalments to the principal debtor, that amounts to giving time to the
principal debtor and the surety is thereby discharged.16

For the discharge of the surety under Section 135, it is necessary that there should
be a contract between the creditor and the principal debtor whereby the creditor
gives time to the principal debtor. Where a contract to give time to the principal
debtor is made by the creditor with a third person and not with the principal debtor,
the surety is not discharged.17 For example, C, the holder of an overdue bill of
exchange drawn by A as surety for B, and accepted by B, contracts with M to give
time to B, A is not discharged.18 In this illustration, C, who is the creditor agrees
with a third party (M) to give time to the principal debtor (B). Even though the
same is without the consent of the surety but that does not discharge the surety (A).

(iii) Creditor promising not to sue the principal debtor

A contract between the creditor and the principal debtor whereby the creditor
promises not to sue the principal debtor, also results in the discharge of the surety.
The surety has a right to sue soon after the payment becomes due, the creditor will
take action against the principal debtor to recover the same. Therefore, the promise
by the creditor not to sue the principal debtor is inconsistent with the right of the
surety, and, therefore, this results in the discharge of the surety.

Mere forbearance to sue not enough

Although a promise by the creditor not to sue the principal debtor discharges the
surety, but a mere forbearance to sue on his part does not discharge the surety.l The
reason is that by promising not to sue, the creditor's right of suing is given up and
the right to sue is thereby extinguished, whereas by mere forbearance to sue, the
right to sue can still be exercised. Section 137 explains the position in this regard
in the following words :

16
Maharashtra Apex Corp. V. Poovappa Salian , AIR 1985 Kant. 116
17
Section 136
18
Illustration to section 136

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"137. Creditor's forbearance to sue does not discharge surety.—Mere forbearance
on the part of the creditor to sue the principal debtor, or to enforce any other
remedy against him does not, in the absence of any provision in the guarantee to
the contrary, discharge the surety.

Illustration :-

B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for
a year after the debt has become payable. A is not discharged from his suretyship."

Forbearance to sue until the end of the period of limitation

Sometimes, there is forbearance to sue the principal debtor by the creditor for such
a long time that because of the law of limitation, the action against the principal
debtor becomes time barred. In such a case, the question which arises is that
whether the surety is discharged in such a situation?

Under English law, in such a situation, the surety is not discharged.2 There are two
reasons for it. Firstly, even though the action becomes time barred, it does not
result in the complete extinction of the debt. Secondly, even though the creditor's
right of action against the principal debtor may not be possible, "the surety can
himself set the law in operation against the debtor".19

The majority of the High Courts in India in their decisions have also adopted the
same position and held that even though by forbearance to sue by the creditor, the
action against the principal debtor is time barred, the surety is not discharged
thereby.20

In Mahanth Singh v. U Ba Yi,21 the Privy Council has also expressed in favour of
the view adopted by a large number of High Courts as stated above, and has held
that failure to sue the principal debtor until recovery is barred by the statutes of
limitation and does not operate as discharge of the surety.22

19
Section 137
20
See Carter v. White, (1883) 25 Ch. D. 666
21
Id., 672, per Lindley, L.J.
22
Sarkar V. Virupakshapa, (1883) 7 (BOM) 146

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SECTION 139 OF INDIAN CONTRACT ACT,1872
BY CREDITOR’S ACT OR OMISSION IMPAIRING SURETY’S
EVENTUAL REMEDY
Section 139 incorporates the rule that when the act or omission on the part of the
creditor is inconsistent with the interest of the surety, and the same results in
impairing surety's eventual remedy against the principal debtor, the surety is
discharged thereby. Section 139 is as follows

"139. Discharge of surety by creditor's act or omission impairing surety's eventual

remedy. If the creditor does any act which is inconsistent with the right of the
surety, or omits to do an act which his duty to the surety requires him to do, and
the eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged."

According to Section 140, the surety after making the payment which may have
become due on performing the duty, on the default of the principal debtor, is
invested with all the rights which the creditor had against the principal debtor. If
the creditor makes an act or omission the effect of which is to impair surety's
remedy against the principal debtor, the surety is discharged. This may be
explained with the help of the following illustrations23

(a) B contracts to build a ship for C for a given sum, to be paid by instalments as
the work reaches certain stages. A becomes surety to C for B's due performance of
the contract. C, without the knowledge of A, prepays to B the last two instalments.
A is discharged by this prepayment.

(b) C lends money to B on the security of joint and several promissory note
made in C's favour by B, and by A as surety for B, together with a bill of sale of
B's furniture, which gives power to C to sell the furniture, and apply the proceeds
in discharge of the note. Subsequently, C sells the furniture, but, owing to his
misconduct and wilful negligence, only a small price is realized. A is discharged
from the liability on the note.

23
AIR 1939 P.C. 110; 66 I.A. 198

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(c) A puts M as apprentice to B, and gives a guarantee to B for M's fidelity. B
promises on his part that he will, at least once a month, see M make up the cash. B
omits to see this done as promised, and M embezzles. A is not liable to B on his
guarantee.

In Nirmal Singh Kukreja v. Suraj Gupta,24 the plaintiff stood guarantor to funding
defendant son-in-law's proprietary business. The defendant having committed
serious defaults in payment of debt due to various financial institutions, the
plaintiff negotiated with the Bank, the creditor, for one time settlement. Pursuant to
the same, the plaintiff paid amounts claimed for in suit by the Bank. After
discharging liability towards the creditor Bank, the plaintiff filed the suit against
the defendant claiming the amount he had paid to his creditors along with interest
@ 18% per annum on payments so made. The plaintiff was held entitled to recover
the amount so claimed along with interest.

In State of M.P. v. Kaluram,25 the State of M.P. made a contract for the sale of
'felled trees' with one Jagat Ram, who was the highest bidder in the auction sale.
The payment for these trees was to be made by instalments. Kaluram was a surety
for the payment by the purchaser of trees. The purchaser failed to pay the second
and subsequent instalments. The State of M.P. did not take any steps to recover this
amount, nor did they stop the removal of the felled trees on default of payment. It
was held that since the State Govt. had failed to take necessary steps to recover the
amount from the purchaser by allowing him to take away the trees, the surety's
remedy against the purchaser (Jagat Ram) had thereby been impaired, the surety
(Kaluram) was discharged from his liability.

If the goods are lost without the fault of the creditor, the surety is not discharged
thereby.26

In M.R. Chakrapani v. Canara Bank,27 the property hypothecated to the bank was
sold by the principal debtor. The surety immediately furnished the particulars of
the sale to the bank, but the bank took no steps either to trace and seize the
property or failed to take any action against the principal debtor by lodging a

24
Id., 112
25
Illustration to section 139
26
AIR 2013 H.P. 23
27
AIR 1967 S.C. 1105

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complaint with the police or filing a case in a criminal court for tracing and
attachment of property and recovering the dues. It was held that the surety was
discharged due to inaction of the bank.

When a bank loses the security deposited with it by the principal debtor due to its
negligence, the surety would stand discharged in respect of the loan given by the
bank on the basis of security.

In Union Bank of India, Bombay v. S.B. Mehta,28 A, a principal debtor, at the time
of taking loan from a bank executed a demand promissory note, an agreement of
hypothecation of goods and other documents in favour of the said bank, and B
stood as surety for the loan granted by the bank to A. The bank sued A and B to
recover the amount of loan. It was found that the goods which were the subject-
matter of hypothecation had been disposed of by A (the principal debtor) due to
inaction and negligence on the part of the plaintiff bank. Due to that, B's remedy to
proceed against A had come to an end, and, therefore, it was held that B was
discharged as surety towards the plaintiff bank.

SECTION 141 OF INDIAN CONTRACT ACT,1872

BY LOSS OF THE SECURITY BY THE CREDITOR
According to Section 141, the surety is entitled to all the securities which the
creditor has against the principal debtor at the time when the contract of suretyship
is entered into. If the creditor loses, or, without the consent of the surety, parts with
such security, the surety is discharged to the extent of the value of the security. For
instance, the seller of the goods allows the buyer to take away the goods without
insisting for the payment of the price for the same, the surety who guarantees the
payment of the price by the buyer, is discharged from his liability.29

It may be noted that if the creditor does not lose the securities but they are lost
without his fault, the surety is not discharged thereby. For instance, when the
hypothecated goods are lost without any fault of the creditor, that does not
discharge the surety.30

28
See R. Lilavati V. Bank of Baroda, AIR 1987, Kant. 2
29
AIR 1997 Kant.216
30
AIR 1997 Guj.48

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Discharge Of Principal Debtor without creditor's fault does not discharge the
surety

According to Section 141, the surety is discharged if the principal debtor gets
discharged due to the fault of the creditor. If there is no voluntary act of the
creditor in the discharge of the principal debtor, the surety continues to be liable in
spite of discharge of the principal debtor.

In I.F.C.I. Ltd. v. Cannanore Spg. and Weaving Mills Ltd.,31 there was a contract
for the supply of textile goods to be manufactured by a certain textile unit. The said
textile unit was nationalized and the assets vested in the Government.

The question arose if impossibility of performance of contract by the principal

debtor discharged the surety from his liability.

It was held that the surety was not discharged even though the principal was
discharged because the discharge of principal debtor was not due to the voluntary
act of the creditor. It was observed that the contract of guarantee has no co-relation
with the Nationalization Act. It is an independent contract and it is not covered
under Section 141 of the Contract Act. The surety continues to be liable in this
case.

Substitution of Surety

In case the surety is replaced by a party without the written approval of the
creditor, the surety is not discharged. For instance in H.P.S.I.D.C. v. M/S. Manson
India Pvt. Ltd.,32 the defendant company and its promoters had taken loan from the
appellant corporation. The promoters unilaterally without waiting for prior written
approval from the corporation as was required under the agreement entered into
between them, transferred their interest in the company to new Directors and
changed management of the company It was held that the promoters were not
absolved of their Personal liabilities under the deed of guarantee with the
corporation.

31
AIR 2002 S.C. 1841
32
AIR 2009 (NOC) 490 (H.P.)

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CONCLUSION

A Guarantee is a promise by one person, who is called the 'guarantor' or 'surety' to

answer for the present or future debt of another person who is called the 'principal
debtor', such promise being made to the party to whom the principal debtor is, or
will become, lia ble.
In Lord Halsbury's Laws of England a guarantee is defined as "an accessary
contract whereby the promisor undertakes to be answerable to the promisee for the
debt, default or miscarriage of another person whose primary liability to the
promisee must·exist or be contemplated.The words surety and guarantor are used
as synonymous terms in Indian law and English Law.In American law, guarantee
is distinguished from suretyship in being a secondary, while suretyship is a
primary, obligation; or, as sometimes defined, guarantee is an undertaking that the
debtor shall pay; suretyship, that the debt shall be paid. A surety differs from a
guarantor, who is liable to the creditor only if the debtor does not meet the duties
owed to the creditor; the surety is directly liable. While a surety's liability begins
with that of the principal, a guarantor's liability does not begin until the
principal debtor is in default.
The ways In which a surety is discharged from his suretyship are exceedingly
numerous, for a surety is a favoured debtor. Speaking generally, however, under
the law of principal and surety, a creditor must not either act in a manner
inconsistent with the contract of guarantee itself, or do anything to prejudice the
right of contribution between the co sureties for should he do so, the surety will be
released, either wholly or protanto.
A guarantor may be discharged or released from his liability under the guarantee
by a subsequent release or agreement, by operation of law, by payment or by
performance of the principal debtor obligation or by a breach of the contract of
guarantee and it may be stated as a general rule that any act or omission on the part
of the creditor in breach of his duty under the guarantee, that increases the
guarantor's risk or otherwise injures his rights and remedies, discharges the
guarantor from his liability under the guarantee, at least to the extent of the injury
so occasioned.

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BIBLIOGRAPHY

WEBSITE:-

 www.indiankanoon.org
 www.lawnotes.in
 www.apptaxlaw.com

BOOKS:-

 Contract II By R.K.Bangia
 Contract And Specific Relief By Avtar Singh
 The Indian Contract Act, 1872 (BARE ACT)

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